Will The RBA Cut Again?

Third time seems to be the charm! We are heading into the third meeting since the RBA last cut the reference rate.

It’s not the only major event coming up tomorrow, however. Among data to look out for, we have Manufacturing PMI and Building Approvals.

So, we could expect quite a bit of volatility in AUD and NZD pairs.

Today marks the end of the third quarter. This means that overnight, a large number of futures contracts will be rolled over, putting extra pressure on the market’s liquidity.

We’re also at the start of the release of third-quarter data, which also moves the market. All in all, it would be a good idea to keep an eye on price action for now.

What We Are Looking For

For the RBA rate decision, there is a pretty broad consensus that there will be a cut.

This, despite the lack of official release of quarterly data. Accompanying the rate decision there is a rate statement and later a scheduled press conference by Governor Lowe. Those factors all but confirm that we’ll get action out of the central bank.

As for the market reaction, given how sure everyone is about more easing, a 25 point cut has broadly been priced into the market. We wouldn’t expect a huge amount of volatility, and that might mean the Rate Statement will be the market mover.

That the statement will almost assuredly include a reiteration that the bank stands ready to take further action. What we’ll be looking at is how dovish the statement is, especially if there is future mention of action. We’ll also be focusing on what the bank thinks of potential negative rates and the potential of unconventional measures.

The Path Forward

The consensus has been that the reference rate would be at 0.75% by the end of the year. This implies one more cut.

So, if the bank opens the door to the rate falling to 0.5% in the next three months, we could say that would provide a dovish surprise to the market.

The other unlikely dovish surprise, that the RBA takes a page out of the RBNZ’s book and cuts by 50 basis points. But no analyst is expecting that.

While the economists surveyed by Bloomberg are pretty confident there will be a cut; the survey among Australia is not as sure.

Both coincide that the rate will be 0.75% by the end of the year, only a small majority of Aussies think we’ll get action this time around. The difference is explained by a differing interpretation of the same argument: that data since August has been largely the same.

This leads the bears to interpret it as implying more action is necessary to support the economy. Meanwhile, the bulls argue that if the data didn’t show the need to cut rates in September then it shouldn’t have changed the outlook for October.

Who’s Right?

On the one hand, we are moving into the more economically active spring and summer season in Australia.

Global trade uncertainty seems to have diminished. On the other, we have the minutes of the last meeting, which did not reference the previous action. This is typically a sign that the bank doesn’t think it needs to wait for new data.

Last week, Governor Lowe said that he’d been “surprised” by the recent downturn in Australia. He argued that the RBA can’t ignore the drop in rates around the world.

He echoed the “long period of low interest rates will be necessary” phrase, which would be the bit traders will be looking for during his next press conference. It would help to make the market feel more comfortable about the pricing in of policy going forward.

The longer-term question now is, how low will the RBA go?

The expected trajectory is to 0.5% by the end of the first quarter next year. Look for some market reaction if there is any talk about the rate approaching zero, and what the RBA might do about that.

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